2008-04-25 U. of Michigan Confidence

U. of Michigan Confidence (Apr F)

Survey 63.2
Actual 62.6
Prior 63.2
Revised n/a

From Karim:

Even weaker than expected at 62.6 vs initial estimate of 63.2.

5-10yr inflation expectations move to higher end of recent range from 3.1% to 3.2%

Following changes from March to April:

Comments below from Survey itself:

January of 2008, and by 39.2% from its January 2007 peak. While that steep falloff indicated a recession even before the latest

decline, the accelerated pace of the decline points toward a longer and potentially deeper downturn. Although the tax rebate

will boost spending temporarily, the global rise in food and fuel prices, the declines in home values, and changes in credit

conditions are likely to persist for some time and lengthen the period of stagnation in consumption. Coupled with weaker job

and income growth, these factors have the potential to cause deeper cutbacks in consumption than now anticipated.

development as in the April survey. The most commonly heard news was about job losses, rising prices, and the fallout from

the housing and credit crisis. Nearly nine-in-ten consumers thought that the economy was now in recession. When asked

about prospects for the economy during the year ahead, three-in-four consumers expected bad times financially, the highest

proportion since 1980.

1970’s, when nearly all prices posted persistently large increases, the recent increase in inflation has been dominated by fuel

and food prices. It would take significant and prolonged increases in interest rates to quell the impact of the global rise in food

and fuel prices on domestic inflation, increases that may not be either politically possible nor economically justified.

uncertainties three times as frequently as they did a year ago. Purchase plans for furniture, appliances, home electronics, and

similar goods fell to their lowest level since the early 1980s, with one-third of all consumers specifically mentioning their

uncertainty about jobs and incomes as their primary reason. Vehicle buying plans also fell to their lowest level since the 1990

recession, with one-third of all consumers citing uncertainty about jobs and incomes as well as the future price of gasoline.

Good report, agreed with all.

A few added comments.

This is a revision of a number has already been out for a while, so it should already be mostly discounted by the markets.

Mainstream economics (not me) would argue that while high food and energy prices are external negative supply shocks, and initially ‘relative value stories’ the Fed has to be careful not to ‘accommodate’ them with low interest rates that support demand as that can cause inflation expectations to elevate and turn a relative value story into an inflation story.

Additionally, mainstream economics assets that low inflation is a necessary condition for optimal long term growth and employment. And while the cost of bring down inflation now may be high, the cost of letting inflation expectations elevate and bringing down inflation later is much higher.

In fact, some in the mainstream argue that had the Fed not supported demand with rate cuts beginning back in August, the cost in lost output to bring inflation back down would have been far lower than the cost to bring it down now after inflation expectations have started to elevate.

It remains to be seen where the Fed stands on this. So far they have been willing to let inflation expectations begin to rise as they focused on keeping the US downturn to a minimum in the face of perceived systemic risk.

Markets are now pricing in the end of rate cuts even as weakness persists, in anticipation of the Fed having reached its tolerance for inflation.

5 Responses

  1. Warren, you are also anticipating a “longer and deeper downturn” as above? Thought you said the economy was going to muddle along?

  2. Still in the muddle through camp, with modest improvement into the election as the fiscal package offers support as well as other govt. spending delayed from 07 and pushed up from 09.

    Exports should keep accelerating, and the dollar weak apart from blips up when/should the fed stop cutting and/or start hiking.

    If they do hike that adds a bit of further support to both inflation and gdp via increased (net) federal spending on interest.

    This is the opposite of the mainstream view that rate hikes hurt demand.

    My view has been that while the fed/mainstream believes the rate cuts have helped gdp in fact it has instead hurt some via the interest income channel.

    I also think the cuts have moderated inflation from where it might have been by a small margin via the income and cost channels.

  3. I think he means that 1) lower interest rates mean lenders are getting paid less which means they have less to spend which reduces aggregate demand and 2) to the extend that interest payments are input costs to production, lower interest rates means lower production costs, which lower cost-push inflation.

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